A Case Study

on
Equity Valuation Coca-Cola Company.
Submitted To:
Dr. Gazi Mohammad Hasan Jamil
Professor, Department of Finance
University of Dhaka.
Submitted By:
ID Name
03-16-043 Khandaker Shahadat Anwar Tamal
09-19-002 Monmoth Dutta
09-19-019 Rakhal Debnath
09-19-020 Abul Kalam Azad
09-19-027 Panchali Das
09-19-030 S.M.Shahidul Alam
Contents
Introduction ................................................................................................................................
1. Valuation Approach ........................................................................................................
1.1 Discounted Cash Flow Valuation ................................................................................
1.2 Relative Valuation ..........................................................................................................
2 Stock and Dividend Performance ...................................................................................
2.1 Equity Value .................................................................................................................
2.2 Relative Valuation ........................................................................................................
2.3 Equity Valuation – Coca-Cola
3. Recommendation
Introduction.
The Coco Cola Company is the leader of global soft drink market with presence in more
than 195 countries globally. As of August 1997, the company’s share price and P/E ratio
were significantly higher than other similar companies in the market. Noticing this
sudden fluctuation in the share price, using multiple financial models, Jessie wanted to
understand whether the current price represents its intrinsic value or not and whether it
is worth in investing in Coca Cola’s share.
1. Valuation Approach: Analysts approach several models to evaluate companies’
stocks. We will be using discounting cash flow and relative company analysis to
evaluate our stock value. For Discounting cash flow DDM and Residual income
model are utilized. And for related company valuation P/E multiple has been
approached.

1.1 Discounting Cash Flaw- In stock valuation models, there are three predominant
definitions of future cash flows: dividends, free cash flow, and residual income.

DDM(Dividend Discount Model)- Dividend discount models (DDMs) define cash

flow as the dividends to be received by the shareholders. The primary advantage
of using dividends as the definition of cash flow is that it is theoretically justified.
The shareholder’s investment today is worth the present value of the future cash
flows he expects to receive, and ultimately, he will be repaid for his investment in
the form of dividends. Even if the investor sells the stock at any time prior to the
liquidation of the company, before all the dividends are paid, he will receive from
the buyer of the shares the present value of the expected future dividends.
Residual income. Residual income is the amount of earnings during the period
that exceeds the investors’ required return. The theoretical basis for this
approach is that the required return is the opportunity cost to the suppliers of
capital, and the residual income is the amount that the firm can generate in
excess of this return. The residual income approach can be applied to firms with
negative free cash flow and to dividend- and non-dividend-paying firms. Residual
income models can be more difficult to apply, however, because they require
indepth analysis of the firm’s accounting accruals.

1.2 Relative Valuation- P/E Multiples indicates how often the profit is included in the
current price of a share or after how many years the profit has repaid the price of
the share. And this is bench marked with relative companies industries and
Overall market.
 2. Stock Valuation
Firstly we will find the required rate of return and we will be using CAPM to find
the required rate of Return.

CAPM to find required rate of return

Risk Free rate for matching Time 5.09%
Horizon-(Rf)
Market Premium -(RM-RF) 6%
Beta-B 1.23
Requried Rate of Return ( r) (CAPM) 12.47%
(Rf+B(RM-Rf))

Present Value of Dividends

r= 12.47%  
PV
Year Dn= Values
(Dn/(1+r)^n
1997 Do 0.56 0.56
1998 D1 0.62 0.55
1999 D2 0.69 0.55
2000 D3 0.78 0.55
2001 D4 0.87 0.54
2002 D5 0.98 0.54
2003 D6 1.09 0.54
Total 3.83
 
PV of Terminal
Value= 50.09
PV of Dividends 3.83
Value of Equity 53.92
 Value of Residual Income-

r=   12.47% W 0.9  
Year t Forcasted Forcasted Ending Book Equity Risidual Present value
Earning Dividiend Value(Bt) Charge Income of RI cash
(Et) (Dt) flaw
1996     2.48     2.48
1997 1.70 0.56 3.62 0.31 1.39 1.39
1998 1.95 0.62 4.95 0.45 1.50 1.19
1999 2.25 0.69 6.51 0.62 1.64 1.17
2000 2.60 0.78 8.34 0.81 1.79 1.14
2001 3.01 0.87 10.47 1.04 1.97 1.12
2002 3.47 0.98 12.97 1.31 2.17 1.10
2003 4.01 1.09 15.89 1.62 2.39 6.42
2004 4.63 1.22 19.30 1.98 2.65  
             
        Value Of Stock 16.01

Relative Valuation.

P/E comparable Coca Pepsi Beverage S&P 500

Cola Cola IND.
Mean PE 19.1 16.7 22.1 18.1
Multiple
Median PE 17.9 15.9 19.8 17.1
Multiple
Earning 1.4
Average Growth of earning next 5
yearse 15%
Forecasted Earning 2.82
VALUE with Mean PE 53.731
VALUE with Median PE 50.405

Recommendation
1. Recommendation of Stock Valuation

From the analysis of Coco Cola financial Information, we found that the intrinsic
value of the share is $ 53.92 (Using Multiple Growth Model) against the current
market price $ 58 per share. Since the current market price is Close to the
underlying or intrinsic stock value, and the dividend residual income all are
close to the Market price. More over the valuation of Price in terms of Free cash
flaw is 100 so it is worth to buy the Coke stock..
2.Recommendation of Price/Earning Multiples
From the analysis we found the current P/E ratio of Coco cola Company is 16.27
times ( justified trailing P/E) against the current Price/Earning Multiplies is 35
times. However the performance in terms of The Mean and Median of P/E
multiple of Coca-Cola company in comparison of Benchmark and industry is
well worth of investing.